Current retirement plan matching contribution formulas have some room for improvement, according to new research from Vanguard.
According to the firm’s “Better Match Formulas for 401(k) Plans” report, released today, employers and employees both stand to benefit from revisions to match formulas that reach mainly higher-income earners. Many workers do not take full advantage of their employer match, and most match dollars accrue to workers who already contribute well in excess of the match cap, the report found.
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However, employers can update formulas to drive better retirement outcomes while making minimal changes to their spending.
“As an economist, you would think a match would be a very strong incentive [to save] and that everybody would take full advantage,” says Fiona Greig, one of the report’s co-authors and a principal and global head of investor research in Vanguard’s investor strategy group. However, “almost three out of every five [matched] dollars are going to workers who are [already contributing] above the match.”
Grieg suggests that better match formulas would pair nonelective contributions with a “stretched match”—a lower match rate paired with a higher match cap.
Impetus for the Updates
Lower-income workers were less likely than higher-income workers to increase their matches to capture the full employer contribution, according to the study. Vanguard data on plans it recordkept in 2023 showed that only 22% of workers earning incomes less than $30,000 maximized their matches, compared with 80% of workers earning $150,000 or more. Slightly more than half of workers (52%) earning between $30,000 and $60,000 maximized their matches, a share that gradually increased as income level rose.
Current formulas vary widely in their overall structure, but key elements include:
- a match rate, such as 50% or 100%, based on employee contributions;
- a cap on the contributions eligible for a match, commonly up to 6% of pay;
- tiers, with some plans offering a higher match rate on initial contributions and a lower rate thereafter; and
- nonelective contributions, which employers contribute regardless of employee action.
Among plan sponsor respondents to the PLANSPONSOR 2026 Plan Benchmarking Report, 20.8% said they offered a “simple traditional match,” meaning 100% on the fixed percentage of employee contributions; 9.8% said they offered a “simple stretch match,” a percentage lower than 100% on a fixed percentage of employee contributions; and 14% offered a tiered match.
A ‘Better’ Solution
Lower match rates were more cost-effective incentives than higher rates, Vanguard’s report revealed. Respondents to the Vanguard report’s companion survey, published in June, reported saving an average of 9.3% without an employer match. Introducing a match caused employees to save more, but quadrupling the match—such as from a 25% rate to a 100% rate—did not come close to quadrupling workers’ savings rates. The boost in savings rates increased just 2.7 times, from 1.8 percentage points to 4.9 percentage points.
Offering a 25% match cost employers 1.5% of payroll per additional 1 percentage point of induced employee savings. For a 100% match, each additional 1 percentage point of employee savings cost employers 2.9% of payroll.
Greig adds that while, in theory, introducing a nonelective contribution would disincentivize an employee to save, Vanguard’s research showed that savings rates rose slightly among workers who received nonelective contributions.
Employers can therefore direct some of their budgets toward nonelective contributions to all employees without reducing retirement account savings rates, the report stated. Doing this would increase plan participation by approximately 36 percentage points for plans with voluntary enrollment and 5 percentage points for plans with automatic enrollment.
“[Employers] can induce more contributions on the part of the worker and induce full participation in the plan, such that everybody gets a piece of the [match] pie, without increasing employer costs,” Greig says.
When asked about any potential drawbacks to the redesigned matches, Greig says any downsides could instead be framed as “nudges.” For example, while a person who was previously earning a full match at 6% would have to stretch their own savings to get the full match, it would push them harder to save a higher percentage of their pay. It could be a challenge for those who find it already difficult to save, but a push to develop good saving behaviors.
Recommendations for Plan and Policy Design
Vanguard estimated that moving the most popular safe harbor-adhering plans—which exempt employers from needing to satisfy nondiscrimination testing requirements—to their savings-maximizing alternatives could generate an additional $6.7 billion per year in employee retirement contributions at no additional cost to employers, without increasing inequality in employer contributions. The firm proposed a new safe harbor match formula that includes a nonelective contribution of at least 2% of pay, plus a 25% match of employee contributions up to 8% of pay, with automatic enrollment and immediate vesting.
The safe harbor formula Vanguard proposed would be:
- “approximately cost-neutral compared to existing safe harbor designs;
- easy for participants to understand; and
- consistent with the SECURE 2.0 Act of 2022’s expectations of auto-enrollment for all new plans.”
“Participants taking full advantage of the match would save 8% of their pay and receive at least 4% of their pay in employer contributions (at least 2% nonelective and 2% matching), for a total of at least 12%,” the report stated. “This would create a policy nudge for workers to save at rates in line with retirement savings targets from industry advice and leading retirement systems (such as that of Australia, which is 12%).”
The 2025 PLANSPONSOR Defined Contribution Survey, upon which the benchmarking report is based, was fielded in mid-2025. The results incorporated the responses of 4,387 plan sponsors.
